Health Insurance Deduction for Business Owners (IRC § 162(l))

S-Corp

• In an S-Corp, the health insurance premiums paid for a more-than-2% shareholder (the owner) must be included in the shareholder’s W-2 wages as taxable income.

• However, the shareholder can deduct these premiums on their personal tax return (Form 1040) as an above-the-line deduction, effectively reducing their overall taxable income.

• The deduction is limited to the amount of wages the S-Corp pays to the owner. If the owner's salary from the S-Corp is lower than the health insurance premiums, the deduction is capped at that salary amount.

Single Member LLC (SMLLC):

• A single member LLC that is taxed as a sole proprietorship allows the owner to directly deduct health insurance premiums as an above-the-line deduction on their personal tax return, similar to an S-Corp.

• There is no need to run the health insurance premiums through payroll, as the SMLLC does not have to issue a W-2 to the owner.

• Like an S-Corp, the deduction is limited to the owner’s business income. If the SMLLC has little to no net profit, the owner may not be able to fully deduct their health insurance premiums.

Key Takeaway: Both an S-Corp and SMLLC allow for a health insurance deduction, but S-Corp owners must include the premiums in W-2 wages, adding a step in payroll processing. For S-Corp owners, making sure their salary is sufficient to cover the premiums is key to maximizing the deduction.